What are Partnerships and Joint Ventures?
A business partnership is simply an arrangement between two or more parties whereby they agree to share in both the profits and losses of a business carried on by all. The partners in this scenario have limited liability for the actions of one another. It is the legal equivalent of a marriage; each partner is bound to the actions and liabilities of the other as a spouse would be .
A joint venture, on the other hand, is a contractual agreement in which two or more companies agree to work together on a specific project; they cooperate as a "joint venture" for a limited time. As the name indicates, joint ventures are typically temporary. They can be formed by an oral commitment or a written contract. Simply put, if one of the parties becomes insolvent, the other is not liable for their debts. Joint ventures function much like a corporation, but each party is not shielded from the activity of the other’s company as a married couple would.
Differences Between Partnerships and Joint Ventures
Partnerships and Joint Ventures are often confused, and partners and joint venturers should understand the differences between the two.
Partnerships are a long-term, ongoing legal businesses. Their growth is not restricted to a short term. While partnerships can be formed for short-term projects, their duration is usually indefinite. This indefinite duration creates an ongoing business entity that is expected to grow and prosper for many years.
Joint ventures are formed for a short-term activity. They are also a business. But unlike partnerships with indefinite duration, joint ventures expire after their limited purpose is accomplished. They are created for a specific task or project. When that task or project is completed, the joint venture, and its relationship, ends.
Partnerships and joint ventures are similar in that both are businesses legally created in documents signed by the parties. They can be organized in any form. They are both purposely created and registered with the federal government using special IRS forms. They are subject to special IRS Tax rules.
With regards to liability, both partnerships and joint ventures impose liability on a party’s assets. However, unlike with a standard partnership, joint venture assets are limited to liability. Joint venture parties are only liable for the specific project they are working on with the other party or parties. No other assets can be touched for liability purposes.
Partnerships and joint ventures are similar in that they share the profits they generate while they are active. However, joint ventures do not share any profits after the project is completed. If there are further projects, they are covered by separate agreements.
Benefits of a Partnership
There are several advantages to forming a partnership. First, formation of the business is relatively easy. Partnerships generally do not require a written agreement, although it is always advisable to have one for larger partnerships. Furthermore, the requirements to form and operate a partnership will be a matter of state law. The default rules contained in state business organization statutes are normally quite permissive. Second, partners share in the responsibility for the management of the business. Shared responsibility and management can provide relief for the burden falling on any single partner. Third, there is some economy of capital in a partnership. Each partner generally brings additional investment to the table as well as additional resources.
Benefits of a Joint Venture
Particularly for companies that are looking to expand into new markets or industries, form partnerships can be a great financial and strategic move. A joint venture lets companies combine the strength of two different businesses and put them to use to even greater effect. This creates synergies like shared expertise and resources, and can help you reduce risk while gaining access to new and different markets, resources and customers. The combination of these factors means that companies can grow and thrive by sharing their knowledge and resources with one another.
While joint ventures may be between any number of entities, they are very common in healthcare in the United States. Typically, these healthcare joint ventures are formed between two or more hospitals or health systems working together on a single project. In fact, 50% of hospitals in the U.S. are in a joint venture with another hospital. While it is common for in-state hospitals to join together to share services, we are also currently seeing a lot of out-of-state hospitals forming joint ventures with New York hospitals to gain a foothold in New York versus going through the trouble to get licensure approval.
Legal Aspects of a Partnership
Partnerships are unincorporated associations of two or more persons formed to operate as co-owners in a trade or business. A partnership is defined by the relationship between the partners to the agreement and not by external factors such as percentage holdings. Although general rules may apply to the different types of partnership, parties entering into a partnership may create their own specific legal rules through negotiation and drafting into their partnership agreement.
A partnership agreement typically outlines the following: Partners can also have liability for partnership debts, contracts and wrongful acts of the partnership. General partners will have unlimited liability unless the partnership is a limited liability partnership or a limited liability partnership. Otherwise, when a partner is acting with authority in the usual course of business of the partnership, each partner is jointly and severally liable with all other partners for all obligations of the partnership unless otherwise agreed. Importantly, the general partner in a limited partnership has unlimited personal liability for the debts of the partnership. For governance purposes, if a partnership has not specified the management or voting rights of each partner in a partnership agreement, the partnership statutes’ default rules will apply. LLCs and corporations are required to adhere to statutory requirements in order to maintain their status. However, with regard to partnerships, unless otherwise provided in an agreement, there are no statutory requirements to adhere to with regard to management or voting.
Legal Aspects of a Joint Venture
With a significant cross-border transaction, the parties must consider the legal implications of the overall structure of the transaction. In the case of a broader business relationship, it is generally advisable to include a detailed joint venture agreement. While there are many tools available for creating an informal JV, it is critical to have a formal legal document that spells out the terms and conditions of the relationship and, more importantly, provides a framework for resolving disputes. Even the most casual business relationship can benefit from some sort of written agreement.
A JV agreement serves several important functions. It can identify and clarify the objectives of the JV, ensure a shared vision and responsibilities among the JV members, and can help identify the resources each party will commit to the JV. In addition , it usually addresses the following major topics:
While different countries have different laws applicable to joint ventures, there are a few regulations that are particularly important and need to be addressed at the time of forming a JV. A party considering entering a particular joint venture should investigate the following potential legal issues before proceeding: Disputes within a JV typically arise over control, achievement, and financial arrangements. A joint venture agreement should include a dispute resolution procedure. The procedures typically are either binding arbitration or mediation, but in any case the procedures should be in accordance with the rules of the governing authority (i.e., JAMS, AAA or UNCITRAL). It is essential for the parties to decide where the disputes will be resolved, the language to be used, and whether a particular set of rules will govern during the process (i.e., UNCITRAL).
When to Consider a Partnership Instead of a Joint Venture
While both partnerships and joint ventures have their distinct advantages, there are scenarios in which a partnership would be more beneficial for forming long-term business relationships. A partnership is often the best choice if you have long-term goals for your pharmaceutical business and a desire to align yourself with a specific pharmaceutical company.
As we previously noted in our article, What to Consider When Forming a Partnership, there are certain clear-cut criteria your pharmaceutical relationship should fit into that simply does not suggest that a joint venture would be the preferred choice. Some examples of these are:
Investors in pharmaceutical companies must not overlook the options available, as there are significant benefits to both partnerships and joint ventures—and even the option of bringing both to bear for the best interests of the company. However, the potential benefits of a partnership over a joint venture must be weighed as well. If you suspect your business plan will require a long-term investment and you are ready to heavily invest in a single pharmaceutical entity, then a partnership is likely your best choice.
When to Consider a Joint Venture Rather than a Partnership
There are some situations where a joint venture is the preferred alternative instead of forming a partnership. One clear example is when you’re looking to work together only on a single short-term project. In this situation, a partnership is still a long-term business entity that would serve no purpose beyond the completion of the project.
If the scope of the project is broad, but still limited in time, the best option is to form a joint venture. A joint venture is designed specifically to achieve a specific collaboration goal that has a defined endpoint. Certain industries tend to have more joint ventures than others. For example, the movie industry is filled with cases where several large film companies come together to produce a film. In that case, there will probably be a single LLC created specifically for that production, and it will disperse as soon as filming is done and the profits divvied up.
In coming together for the sole purpose of completing one project, you and your JV partners are able to set out exactly what the terms of the relationship are. There are no loose ends or undefined roles to navigate as you put the project together, and you have the ability to clearly state that once the project is complete, the venture is complete as well.
So if you’re looking for a way to partner with another company for a single purpose or project, you may be better off forming a joint venture than a partnership.
Case Studies: Practical Insights
When it comes to really driving home the potential success and benefits of partnership and joint ventures, it’s hard to do better than real-world examples. These two areas of cooperative endeavor have seen brilliant successes and exemplary failures in the past. As a business or professional service provider, you would do well to be informed of the previous hits and misses of your peers and those who came before you.
One key example that many collaborative business arrangements are patterned after is the "six-month rule" made famous by industry giants Kronos and IBM. Late in 2010, industry giants Kronos and IBM entered into a strategic alliance. Both companies wanted to expand their market share into both human capital management (HCM) and workforce management (WFM). In order to do this, they needed to make a mutual commitment to each other’s visibility and presence in both respective markets. Their joint venture saw both parties really doubling down on strategic investments with the goal being to achieve a larger market share in both HCM and WFM. How deeply did these two industry giants dig into their wallets? They invested two million dollars. It’s the sort of investment that leads other giants to raise an eyebrow, though it paid off handsomely for both companies. IBM and Kronos learned some things that many new partners entering into an arrangement with a joint venture will find helpful to take note of. IBM and Kronos both understood that to enter into a winning collaborative arrangement one has to understand each other’s core values, motivations, goals, and objectives at the outset. It became clear that neither company viewed the other as a "co-venture." IBM was simply interested in positioning itself as a front and center face in the HCM game. Kronos was interested in positioning itself as a front and center face in the WFM game. Thanks to this mutual understanding, a successful strategy within their joint partnership could be employed. The big picture here is that the mutually agreed upon goals of the venture are critical if the arrangement is going to work. This is a key factor for many new joint venture agreements. When it comes to really hammering home the idea of successful partnerships and joint ventures, we can also look at the classic example of Microsoft. When it comes to the technology game, one thing goes without saying: Microsoft has never been known for clever and out-of-the box thinking in terms of collaboration and other cooperative ventures. So when they teamed up with AOL and created an Internet giant, the partnership seemed out of left field. But the people pulling the strings understood that both companies had strong advantages within each of their specific fields, and both had something very valuable and tangible to offer the other. Microsoft had the technology that enabled a strong, stable, and sturdy infrastructure, which could be used to carry the users and traffic AOL was bringing to the table. AOL had a customer and user base that Microsoft was making money off of already through running ads on its network. By teaming up, Microsoft and AOL were able to leverage each other’s best features. By 2011, the investment had paid off dramatically, with revenue for Microsoft increasing substantially.
Closing Remarks and Final Observations
The discussion of the differences between a partnership and a joint venture is not about finding the best choice, but finding the best choice for what you want to do. A business person may want to create a new short-term business effort for a particular outcome. For that person, a joint venture is the better choice . A person wanting a long-term permanent effort who has single-source funding may want a partnership. Creating choices based on business needs and goals allows the selection of the form that will serve your purpose best. What’s best is not always the same as what others may have selected.
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